Blog | Aptivaa

11

Jul, 2016

Impairment Modeling in Retail – Many Moving Parts

By: Aptivaa | Tags: Account Level, Approach, Aptivaa, Collective Loan Loss, ECL, IFRS 9, Impairment, Modeling, PD, Pool, Retail, Roll Rate, Stage Assessment, Vintage Loss | Comments: 0

Financial Institutions across the globe are preparing themselves to meet the January 2018 deadline for compliance with IFRS 9. One of the most critical aspects of the new standard is the way impairment provisions have to be calculated; moving away from an Incurred Loss model to an Expected Loss model. The model is commonly referred to as the “three-stage” Expected Credit Loss model (ECL) which has been explained in the earlier blog post “Stage Assessment – Devil is in the Detail”. Impairment modeling complexities can greatly differ between Corporate and Retail Portfolios and pose different […]

28

Jun, 2016

Exposure at Default: IFRS 9 Ramifications

By: Aptivaa | Tags: Bayesian, CCF, Decision Tree, EAD, ECL, Expected Credit Loss, Forward Looking, LEQ, Maturity, Prepayment, Undrawn Exposure | Comments: 2

Under IFRS9 Framework, impairment assessment requires computation of Expected Credit Loss (ECL) that reflects a probability-weighted outcome, the time value of money and the best available forward-looking information. The ECL can be computed using cash shortfall approach or modular approach using risk parameters like PD, LGD, EAD and Maturity. Of these, we have discussed PD and LGD in detail in our previous blogs. In this blog we intend to touch upon Exposure at Default (EAD). Exposure at Default (EAD) is an estimate of a financial institution’s (FI) exposure to its counterparty at the time […]

10

Jun, 2016

Cash Shortfall & LGD – Two Sides of the Same Coin

By: Aptivaa | Tags: | Comments: 2

Under IFRS 9, Expected Credit Loss (ECL) for financial instruments should be an unbiased and probability weighted amount, which is determined by evaluating a range of possible outcomes. To meet this requirement, banks will be required to determine “Expected” default path of the financial instruments and estimate the possible “Credit Losses” along that path. IFRS 9 defines “Credit Loss” in terms of “Cash Shortfall” or credit loss estimation through projected cash flow discounting. However, there is little explicit information available as to how “Cash Shortfall” should be computed; should it be computed separately or along […]

25

May, 2016

Crystal Gazing – Estimating Lifetime PDs

By: Aptivaa | Tags: 12, Adjustment, Approach, Aptivaa, Binomial, Chain, Credit Loss, Deterioration, ECL, economic, Estimate, Expected, External, Forward, IFRS 9, Lifetime, looking, Macro, Markov, month, PD, Rating, Scenarios, Term Structure, Z Score | Comments: 0

In our earlier blog, we discussed PD terminology and PD calibration approaches as applicable to the IFRS 9 framework. IFRS 9 has mandated computation of Impairment Losses, approach for which has been discussed in our 6th blog post. For computation of Expected Credit Loss (ECL), IASB expects organizations to consider forward looking information including macroeconomic factors that are relevant to the exposure being evaluated and that must go beyond historical and current available data. BCBS strongly endorsed this requirement in its paper published on 18th December 2015 (Please refer to our white paper around BCBS Guidelines […]

13

Apr, 2016

PD Calibration- A Delicate Balancing Act

By: Aptivaa | Tags: 12, Aptivaa, Benchmarking, Calibrate, Calibration, Default, ECL, economic, Estimate, Expected Credit Loss, External, Factors, IFRS 9, Lifetime, Macro, month, PD, PIT, Rating, Stress, Term Structure, TTC, Z Score | Comments: 0

As discussed in our previous blog, PIT PD describes an expectation of the future, starting from the current situation and integrating all relevant cyclical changes & all values of the obligor idiosyncratic effect with appropriate probabilities. A PIT PD mimics the observed default rates over a period of time. TTC PDs, in contrast, reflect circumstances anticipated over an extremely long period, and thus nullify the effects of the credit cycle.

2

Apr, 2016

Demystifying PD Terminologies

By: Aptivaa | Tags: 12, Aptivaa, Calibration, Corporate, Default, ECL, Estimate, Expected Credit Loss, IFRS 9, Lifetime, Model, month, PD, PIT, Rating, Term Structure, TTC | Comments: 0

A key metric that summarizes the credit worthiness of a bank’s obligor is the Probability of Default (PD). Besides credit worthiness assessment and capital computation under IRB, PD is one of the key metrics required in the updated IFRS 9 accounting standards. At present, there are many PD related terminologies used in the banking industry, such as: PIT PD, TTC PD, 12-month PD and so on. Such a wide spectrum of terminologies has led to confusion among users, especially when it comes to IFRS 9, which lays special focus on […]

31

Mar, 2016

Target Operating Model – Engaging with the Auditors early

By: Aptivaa | Tags: 12, Aptivaa, Assessment, Computation, EAD, ECL, Estimation, Expected Credit Loss, IFRS 9, IT Architecture, LGD, Lifetime, month, PD, Stage, Target Operating Model | Comments: 0

As the methodologies for IFRS 9 Implementation are still evolving, many banks are in the process of developing a roadmap towards implementation and are still evaluating methodologies that are likely to conform to the principles of proportionality and materiality. To meet the January 2018 deadline, several banks will not be able to embrace a textbook implementation, and will have to adopt practical approaches to several principles espoused in the guidelines. In our blog ‘Impairment Modelling – No silver bullets’, we spoke about the options that banks have with respect to […]

25

Mar, 2016

Impairment Modelling

By: Aptivaa | Tags: Aptivaa, Discount Cashflow, EAD, ECL, economic, Expected Credit Loss, IFRS 9, Impairment Modeling, LGD, Lifetime, loss, Macro, Model, Modelling, PD, Provision, Rate, Roll, Scenario, Stage, Vintage | Comments: 0

The new standard on financial instruments accounting – IFRS 9 has significantly transformed banks’existing impairment assessment to address concerns about “too little, too late” provisioning for loan losses.In our previous blog i.e. “Stage Assessment – Devil is in the detail” we discussed how lifetime PDs are used for stage assessment of instruments, apart from other nuances of assessing significant deterioration of credit quality. Entities are required to recognise an allowance for either 12-month or lifetime Expected Credit Losses (ECLs), depending on whether there has been a significant increase in credit […]

9

Mar, 2016

Stage Assessment – Devil is in the Detail

By: Aptivaa | Tags: 12, Aptivaa, days past due, Deterioration, DPD, ECL, Identify, IFRS 9, Impairment, Lifetime, month, PD, Practical Expedients, Significant Increase, Stage 2, Stage Assessment | Comments: 0

In our second post ‘building blocks of Impairment Modeling’, we had highlighted that IFRS 9 uses a ‘three stage model’ for measurement of ECL, and one of the major challenges of implementing this model was tracking and determining whether there has been a significant increase in risk of a credit exposure since origination. This blog post delves into the intricacies related to the three stage model, and some nuances that need to be considered for a bank looking to implement IFRS 9.

4

Mar, 2016

IFRS 9 IT Architecture

By: Aptivaa | Tags: Aptivaa, ECL, Estimate, Expected Credit Loss, IFRS 9, Impairment, Infrastructure, IT Architecture, Methodology, solution, Strategic, Tactical | Comments: 0

As the race against time to comply with IFRS 9 guidelines begins, several software solutions are being bandied about as a quick fix solution for automating the entire impairment modelling process. While automating is definitely the way to go in initiatives such as these, the question remains as to whether the software architecture should be of a strategic integrated nature or one that is decoupled and modular.